What is Crowdfunding?

Crowdfunding (also known as crowd financing, equity crowdfunding, or hyper funding) is a term used to describe the collective effort of individuals who pool their resources to support the creative efforts of companies, political organizations or other people.

Crowdfunding has been used to finance disaster relief, citizen journalism, artists, musicians, political campaigns, startup companies, movie and software development and scientific research. Like any other type of investment, crowdfunding comes with both benefits and drawbacks that must be taken into consideration by anyone considering utilizing it to generate revenue. For a list of successful campaigns check out this article on crowdfunding.

Pros of Crowdfunding:

1)      It Raises Your Reputation: high-profile ideas generate attention. A company that uses crowdfunding to attract a plethora of investors with an innovative idea will simultaneously ensure higher levels of corporate name recognition among consumers.

2)      Free Advertising: crowdfunding is a great way to generate buzz about whatever it is you intend to produce. People who invest in your project want to see it succeed, which means they also have a built-in incentive to advertise your project for you. This, in turn, creates a snowball effect—the more people you have investing in and talking about your project, the easier it is to attract potential future investors.

3)      Built-in Beta Testing: crowdfunding creates a unique relationship between the producer of a project and the project’s target audience. The audience gets insight into the creative process in exchange for honest feedback. This means that even unsuccessful projects can be helpful in the long run—the process of crowdfunding provides data and market feedback that can be used to increase the effectiveness of other projects in the future.

4)      A Penny Saved is a Penny Earned: never underestimate the value of micro-transactions! Small donations can (and do) start to pile up. Just ask 68-year-old bus monitor Karen Klein, who accepted donations of $5, $10 and $20 to raise a grand total of $703,168.

5)      Cutting out the Middle-Man: crowdfunding is one of the most effective ways to cut out “the middle-man” and ensure that any money spent goes directly to the people who are actually creating the project. Investors no longer have to worry about record labels or film distributors exploiting artists for an unfair chunk of the total profit.

Cons of Crowdfunding:

1)      Donor Exhaustion: crowdsourcing is a bit like drawing water from a well—if you tap a specific network too often or too many times, support can start to dry up. A project that is initially popular might begin to lose support when the novelty of your idea begins to wear off. At that point, the original stream of revenue is reduced to a trickle and it becomes difficult to keep momentum going.

2)      All Failure is Public: if a company uses crowdfunding to attract investors and fails to live up to its promises, the company’s reputation with consumers could be irreparably damaged. This, in turn, could make it difficult for the company to attract investors to future projects.

3)      Potential for Plagiarism: with the crowdfunding method, individuals with unique ideas are forced to share those ideas with the public in order to attract potential investors. If someone likes an idea they find on a crowdfunding website, there’s nothing to prevent that person from swooping in and stealing that idea—especially if they already have access to the necessary start-up funds.

4)      Fear of Abuse: crowdfunding is not subject to the types of rigid scrutiny that other forms of investment are forced to undergo. People who invest money in a crowdfunded project have no way of knowing what the budget for that project actually looks like, which means that there’s no way to ensure that the money invested is being spent honestly.

5)      No Investor Control:

If the direction of the project changes, the people who supported the producer’s original vision are out of luck. They can’t demand a refund. They can refrain from making additional investments, but that won’t do anything to temper the enthusiasm of investors who do support the new direction the project is taking.

Janelle Pierce enjoys writing about various business issues, and spends her time answering questions about crowd funding and other topics. She is an advocate for young entrepreneurs and business innovation.

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  1. A great summary. To the pro’d, I’d also add that you keep complete control over your project, which is the flipside of what you listed as a con (“No Investor Control”).

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